Identifying and Executing Managed Services Growth Plays

Managed Services represent an important growth opportunity for tech companies today. In this narrated presentation, James Kirwan discusses why tech companies should strive to generate or increase Managed Service revenue and details five key avenues companies can pursue to either launch or grow their Managed Services offerings.

Video Transcript

Slide 0

I’m James Kirwan with Waterstone Management Group. Today we will be speaking about identifying and executing Managed Services growth plays.

Slide 1

We define Managed Services as the proactive management of a technology product on behalf of a customer, typically through a subscription model. We also include broader outsourced services that are related to and/or adjacent to a vendor’s products, such as workflow outsourcing. A simple example of a managed service is a hardware vendor that sells hardware to a customer, but then proactively manages the device’s network security and back-end infrastructure on behalf of the client for a monthly fee.

Slide 2

Before delving into Managed Services growth strategy, it is important to understand why companies should strive to generate or increase Managed Services revenue in the first place.

One of the basic tenets of the tech economy is that investors are willing to pay a premium for recurring revenue vs. one-time revenue.

Companies with a high percentage of revenue that is derived from recurring subscriptions are rewarded with higher valuations. The recurring nature of the Managed Services subscription model means that technology companies can boost their valuations through the use of Managed Services offers.

Companies that have been most successful in generating high value Managed Services revenue have several characteristics in common. They often have a particular domain focus and are specialized within a specific industry or market. They leverage remote monitoring which enables them to proactively support clients and solve problems before they happen. They have an automated delivery model that enables repeatable and scalable services. They often have elements of value-based pricing, allowing for a mutually beneficial relationship with the client. They leverage a services-centric selling model through which the Managed Services are positioned as a key component of the overall solution, rather than a bonus or afterthought tacked on with the underlying hardware or software. Finally, they dedicate a portion of the R&D budget specifically to the services to ensure the offer is cutting edge and provides real value.

Slide 3

Managed Services currently represent a significant portion of the overall IT Services market, and are projected to grow at a faster rate than the rest of the overall market. As hardware and traditional license and maintenance revenue have slowed in recent years, Managed Services has become one of the faster growing and more attractive components of the IT market. Given its subscription model, Managed Services can act as first step for legacy hardware and software companies looking to tap into the fast growing as-a-service market

Slide 4

There are five key avenues through which companies can either launch or grow their Managed Services offerings.

They can increase the attach rate of Managed Services to their core hardware or software offerings.

They can explore adjacencies to improve their existing Managed Services offerings or develop new offerings.

They can leverage existing client data to empower their existing offerings or develop new offerings.

They can use alternative business models to unlock new revenue streams with Managed Services.

Finally, they can expand geographically.

Slide 5

Perhaps the simplest way for a company to grow its Managed Services business is to increase the attach and upsell of Managed Services with its core hardware and software. Companies should take a rigid, granular look at their sales and packaging constructs to see if attach and upsell dynamics can be improved.

At the most basic level, a company might require mandatory attach of Managed Services with its core hardware or software offerings. This packaging strategy certainly increases attach and is appropriate in certain cases, but care should be taken that this does not deter customers that do not require the managed service. In particular, mandatory attach of remote monitoring, even if a fee is not charged for it, is a managed service that can be extremely advantageous for a vendor.

A less aggressive alternative is providing tiered support offerings. This gives the ability to offer premium packages with Managed Services to clients with the most specific needs, as well as hardware- or software-specific options for clients without Managed Services needs.

Measures can also be taken to encourage sales reps to push Managed Services – this can be very helpful as we often see Managed Services not emphasized in the sales process as much as it should be. Developing a services-specific sales team, or incentivizing reps to sell services through quota requirements or bonuses and escalators, can be effective ways to ensure the sales team is pursuing Managed Services opportunities.

Steps can also be taken to ensure that sales opportunities are being identified in the first place. A prime opportunity to identify these leads is through the client interactions that take place during the delivery of the core hardware or software. These direct client interactions are a great opportunity to understand clients’ pain points and identify areas where they would benefit from outsourcing.

Even outside of direct client interactions, detailed reviews of customer data can certainly uncover Managed Services opportunities, even ones that the client might not be aware of on their own.

Although the temptation is often to go for the shiny new object, Waterstone’s experience working with many tech companies has shown this is often the #1 growth opportunity. For example, one of our clients, in the telecommunications industry, added a mandatory attach for basic support when they revamped their maintenance offering. This change had a positive impact on service revenues.

Another client example of success with this approach is a video equipment company. Originally, they focused on hardware and sporadically sold extended warranty contracts. They developed a services bundle including a Managed Services offering, and gave their sales team double credit for services sales, doing so on a total contract value for multi-year deals. This is a different model than many companies, which compensate Services sales at lower commission than core hardware or software. Some do not even comp services at all. This client quickly built up significant services backlog, which increased the company’s valuation.

Slide 6

Another opportunity to unearth new revenue opportunities is through exploring services adjacencies.

One avenue is to is to examine direct competitors. Are they offering ancillary services outside of their core offerings? Have they recently brought new offers to market? If competitors are already offering Managed Services, the market may have an appetite for these services that you can capitalize on.

Oftentimes, companies need to look no further than their existing customers for Managed Services revenue opportunities. Vendors should develop a thorough understanding of client needs and use cases to determine managed service opportunities around its existing hardware or software offers that can make them more valuable to clients. In particular, special attention should be paid to services that clients would prefer to outsource; key candidates are services that clients lack the expertise, resources or scale to deliver on its own. For example, common Managed Services around hardware are remote security or maintenance services provided by vendors that save clients from having to develop the scale to service the machines on their own.

Slide 7

One of the best ways to identify Managed Services opportunities is through the creative use of data.

Companies should think hard about all of the data they have access to, even if it has historically been unused or ignored, and see what insight it gives into their customers. Hardware and software companies often have unique access to customer data, particularly around usage. Special attention should be given to data provided by third-party and partner relationships, as this could present opportunities to provide new offers that either strengthen the value-prop of the partnership, or even displace the partner if advantageous.

Leveraging customer data can provide deep insight into the customers’ workflow and economics, presenting the opportunity for a vendor to insert itself into new parts of clients’ operating model and processes.

Value-added services around the data/workflow intersection can be extremely attractive to clients that are looking for efficiencies in their processes, or even new revenue opportunities of their own.

One Waterstone client that has effectively leveraged client data to create new Managed Services offerings is a vendor of ATMs to banks. Through use of remote monitoring, the vendor has granular visibility into ATM usage and is even able to tell how much cash enters and leaves the machines. By using historical data at the individual machine level, the vendor is able to provide predictive analytics to show the optimal times for the bank to replenish cash from an armored car service, saving banks millions in working capital expense.

Slide 8

Companies can also launch or grow their Managed Services business by identifying alternative business models and new revenue streams.

Careful attention should be paid to competitors with non-traditional business models and revenue generation techniques, particularly new market entrants. Closely monitoring these players can help a company gauge the feasibility of a new business model and help determine if the vendor should go to market with this model as well.

Vendors seeking growth should also determine if they have the right pricing model in place. The pricing models best suited for a managed service tend to be dynamic, with fees tied to usage and/or outcome. In organizations where Managed Services take a backseat to traditional hardware or software, Managed Services are often priced as a percent attach to the hardware or software. Much more appealing to customers is an offer where the pricing is tied to the outcome delivered. An example is a managed service around providing network security where fees are determined at least in part by number of threats thwarted or the percent success rate each month. This ensures that the customer’s fees are at least partially tied the value derived from the service. The most sophisticated Managed Services businesses incorporate a gain-sharing element into their pricing model. In these cases, at least part of the vendor’s fee is comprised of a portion of the financial benefit that the customer achieves through use of the service.

Companies should also think of Managed Services as a component of a business outcome that they are providing, and package it as part of a unique offer bundle with hardware and/or software. Managed Services can often be an enabler or even the missing piece that ties together the disparate pieces of a compelling offer.

One Waterstone client that effectively put this into practice was a vendor providing software and data to the hotel industry. This company was losing share to low-end competitors, particularly around its lucrative reservations software product. To combat them, the vendor created an all-you-can-eat bundled offering, combining their industry-leading market data with unlimited access to all of their reservation software products and provided it on a fee per hotel room night subscription basis. Competitors could not match this bundled offer.

Slide 9

One of the most common strategies to grow Managed Services businesses it to go to market with existing services in new markets.

When considering expansion into a new region, it is important to evaluate the potential market size for the offer and potential industry growth. There should be adequate revenue opportunity and room to grow in order to justify market entrance costs, which are typically significant in order to deliver a managed service.

The importance of geography to the largest existing and potential customer must also be considered. Even if based in your headquartered country, large global customers may require global service coverage in order for you to win the deal. Existing customers may also push hard for a vendor to expand geographic coverage into new regions

Rapidly evolving regulatory environments around the world, particularly in industries including financial services and healthcare, present opportunities for Managed Services. These changes often prompt companies impacted by new regulations to outsource certain elements of their business to ensure they are in compliance. Industry events, such as global rollouts of financial regulations, present opportunities for vendors to bring Managed Services to new geographies.

When expanding to new geographies, there are significant delivery model considerations that must be addressed for Managed Services. These services typically require feet on the ground, language capabilities, and expertise around regional requirements. Therefore, the decision of whether to build operations organically in the new region, or partner with a local provider, is critical.

When one of our clients consummated a significant merger, they reevaluated their new combined client base and services resources in each geographic region. This analysis led them to a strategy to bring the sale and delivery of Managed Services back from channel partners in targeted countries.

Slide 10

These five avenues for Managed Services growth show that there are many opportunities for growth plays, however, determining where to point your guns can be challenging. Given the high investment required to effectively execute on any of these growth strategies, we find that companies are typically only able to focus on one or two individual plays at a time.

Slide 11

Therefore, we recommend that a cross-functional task force use a consistent framework to evaluate Managed Services growth plays. By having stakeholders from different functions evaluate growth plays across offer, financial and go-to-market considerations, companies are best positioned to identify the most attractive avenue for growth.

Slide 12

However, our experience has consistently demonstrated that just as important as identifying the right growth strategy is having the right operating model to enable growth. To achieve profitable growth, companies must have a well defined operating model around selling, offerings, delivery, and governance and support. Each of these four pillars has many subcomponents that require defined strategies and processes.

Slide 13

Waterstone has worked with many players in the Managed Services space and helped them not only identify growth strategies, but also progress to mature operating models to ensure their growth is sustainable and profitable. Through this, we have developed our Managed Services Maturity Model, which we dive deeply into in other insight items that are available on our website.

Slide 14

We hope you enjoyed this presentation, and please feel free to reach out to us to discuss Managed Services in more detail. Thank you.

About the Author

James Kirwan

James Kirwan is a Senior Associate at Waterstone. James specializes in delivering value for technology companies and their investors through analysis of markets, competitive landscapes, financial and operational performance, and growth opportunities.